The External Cost of Prostitution: Evidence from Downsizing Red Light Districts in the Netherlands

Dr. Rafael Perez Ribas, University of Amsterdam (UVA)

The world's oldest profession has always been controversial throughout the history. On one hand, supporters claim that prostitution is a human right and inevitable. On the other hand, societies have traditionally attached a negative connotation to paid sex, mostly because of its association with many forms of violence, such as human trafficking, discrimination, and sexual abuse. The debate on prostitution gained new momentum in 2015 following a policy call by Amnesty International to protect the rights of sex workers, which several activist groups strongly opposed. To make informed decision on new policies, it is crucial to verify how harmful the industry of paid sex is to society.This paper is the first attempt to value prostitution externalities. The assessment is made by quantifying the discount that households require to live next to a brothel. In our tests, we exploit a unique feature of Amsterdam's Red Light District (RLD), where private homes are next to prostitution windows and inside a perimeter naturally delimited by canals. Using a two-dimensional difference-in-discontinuity (DiD) estimator, we find that households require a discount as high as 24% on homes inside the RLD. We also find that this discount disappears once sex windows are forcibly closed by local authorities. Notably, by incorporating the exact geographic coordinates of brothel closings, our empirical design allows us to establish a direct link between these closings and changes in price discontinuities. To test whether the external costs of prostitution are offset by the economic impact of the sex industry (e.g., income and job creation in the sex industry and related ones), we estimate the net effect of closing the entire RLD of Utrecht (the fourth largest city in the Netherlands) in 2013. House prices increased by 5% on average following this event. In both cities, the closing of brothels is also associated with a drastic reduction in crime rates. Overall, our findings suggest that prostitution is very costly to society due to the nuisances that it creates.

About the speaker

Rafael Ribas is an Assistant Professor in Finance at the University of Amsterdam and have a Ph.D. in Economics from the University of Illinois. He also worked for the International Policy Centre for Inclusive Growth (IPC-IG) between 2006 and 2008. His research is focused on externalities in social and labor market policies, entrepreneurship, education, and applied econometric modelling. Some of his studies have been awarded with prizes, such as the GDN Medal for Research on Development, the RCFS Best Paper Award from the Society for Financial Studies, and the McNatt Memorial Award from the University of Illinois, and published in journals, such as the Journal of Development Studies, IZA Journal of Labor Economics, and the Latin American Research Review.